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Ukraine's gas producers call for upstream incentives amid industry slump

Highlights

Industry body warns of risk of spending cuts on gas output

Urges changes to tax regime to incentivize drilling

Current environment 'matter of grave concern': AGPU

London — Ukraine's gas industry association on Tuesday called for the government to put together a package of incentives for companies to continue upstream work in the country, warning that spending cuts could lead to a dramatic fall in production in the medium term.

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The Association of Gas Producers of Ukraine (AGPU) said a fall in production would threaten the country's ambition of achieving gas independence and halting imports.

"The situation in the domestic gas industry is a matter of grave concern," it said in a statement posted to its website.

"Under the current conditions, there is a real threat of a drastic reduction in production as a result of the partial or complete reduction of investment. Today, the industry is in dire need of incentives, without which it is impossible to expect continued drilling of new wells and exploration at new fields," it said.

Ukraine last year produced 20.7 Bcm of gas, almost enough to meet consumption of 26.4 Bcm, and Kyiv has opened up large swathes of acreage for new exploration over the past year.

But with producers slashing spending due to the slump in oil and gas prices, AGPU fears that work will be suspended and new gas fields left undeveloped.

The association said that a fall in investment in gas production would lead to "a number of shocking consequences," including a weakening of the state's energy independence.

"An extremely important condition in a crisis is the support of an industry directly responsible for the country's energy independence," AGPU Honorary President Daniel Maidanik said.

Urgent steps

The association called on the government to take a number of urgent steps to incentivize continued upstream activity.

These include: the reduction of the tax burden for recovered wells that have not produced over the past two years; the introduction of incentives for the production of unconventional gas; the development of a transparent methodology for determining what constitutes an unconventional deposit; and the extension of the state-guaranteed term for taxation of production from new wells from five to 10 years.

"In addition to the first steps, the association calls on the energy ministry to begin developing a broad package of incentives for new drilling in the gas industry, the main purpose of which is to maintain production at the current level," it said.

Maidanik said the crisis in the global oil and gas industry would end sooner or later, and it will be those countries that successfully incentivized continued upstream work that will be favored by explorers in the future.

"In the global investment race, priority will be given to those countries that will create the best incentives for investment. We need to act coherently and work ahead of the curve," Maidanik said.

New energy minister

AGPU also called for the "urgent" appointment of a new energy minister to replace former minister Oleksiy Orzhel.

Ukraine has been without an energy minister since March 4 when a new government took office led by Denys Shmygal.

"The association draws the attention of the country's leadership to the urgent appointment of an energy minister, which is critical for continuing a constructive dialogue on the introduction and implementation of a long-term incentive package to support domestic gas and oil production," it said.

Artem Petrenko, executive director of the association, added: "Ukraine's gas companies are fully supportive of the Ukrainian authorities' efforts to protect Ukrainians and fight the COVID-19 pandemic in the country. Together, we must do everything we can to quickly and effectively overcome the effects of the economic crisis."